Finance minister Arun Jaitley signalled a reset of India’s fiscal policy by focusing more on the parameter of debt-to-GDP ratio than fiscal deficit in coming years as recommended by an expert panel.

The panel on reviewing India’s performance on fiscal discipline and suggesting a future road map headed by former revenue secretary N.K. Singh has suggested a sustainable debt path must be the principal macroeconomic anchor of India’s fiscal policy. The committee has favoured combined debt-to-GDP of 60% by 2023, 40% for the central government and 20% for state governments.

The committee has also recommended 3% fiscal deficit for the next three years and has also provided for ‘escape clauses’, for deviations up to 0.5% of GDP, from the stipulated fiscal deficit target.

Among the triggers for taking recourse to these escape clauses, the panel has included “far-reaching structural reforms in the economy with unanticipated fiscal implications” . Demonetization, for instance, would fit that description. “Although there is a strong case to invoke this escape clause, I am refraining from doing so. The report of the committee will be carefully examined and appropriate decisions taken in due course,” Jaitley said.

Jaitley marginally deviated from his earlier fiscal consolidation road map by pegging fiscal deficit at 3.2% of gross domestic product (GDP) for 2017-18, deferring the 3% of GDP target by a year.

In the medium-term fiscal policy statement presented along with the budget, the finance ministry said the government on a reassessment of the macroeconomic needs of higher public expenditure in a scenario when private investment is not picking up has tilted in favour of the gradual reduction of fiscal deficit. The government has also reduced revenue deficit to 2.1% of GDP in 2016-17 from the budget estimate of 2.3% of GDP and has pegged it at 1.9% of GDP for 2017-18 from 2% of GDP as mandated by the Fiscal Responsibility and Budget Management Act.

“It will be our endeavour to improve upon these fiscal numbers, especially the fiscal deficit, in the next year, through greater focus on quality of expenditure and higher tax realization from the huge cash deposits in banks, triggered by demonetization,” Jaitley said in his budget speech.

William Foster, vice-president, Sovereign Risk Group, Moody’s Investors Service, in a statement said this year’s budget marks a continuation of the government’s fiscal objectives and policies.

“The budget speech’s emphasis on fiscal prudence indicates continued commitment to gradual fiscal consolidation remains. This is consistent with the target of a deficit at 3.2% of GDP this fiscal, followed by 3%. These targets are not materially different from the previous road map and our projections,” he said.

Foster said the FRBM committee’s recommendation of targeting a debt-to-GDP ratio to 60% by 2023 is achievable as long as nominal GDP growth is sustained at robust levels. “It will imply gradual fiscal consolidation, largely through higher nominal GDP growth feeding in the government’s revenue,” he said.

At the core of the fiscal arithmetic is the assumption regarding nominal GDP growth of 11.75% which economists say may be too ambitious. N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, said the nominal growth projection which comes on the back of a 11.9% growth estimate by the statistics department for 2016-17 may be difficult to achieve. “The 2016-17 GDP number is likely to see a huge revision as it has not taken into account the demonetization impact. The upward revision of 2015-16 GDP growth figure will also put downward pressure on 2016-17 GDP numbers due to a higher base in the previous year,” he said.

The statistics department raised its real GDP growth estimate for 2015-16 to 7.9% from 7.6% earlier.

Bhanumurthy said the tax revenue buoyancy assumed for 2017-18 also looks over-optimistic. Government has assumed 12.7% growth in net tax revenue in 2017-18 which may be difficult with rising oil prices and uncertainty surrounding impact of goods and services tax on tax receipts in the first year.

Government has also set an ambitious Rs72,500 crore target for disinvestment for 2017-18 against the revised estimate of Rs45,500 crore for 2016-17. The government has so far collected Rs27,917 crore through stake sales in public sector units in 2016-17, implying government targets aims to sell stakes (in state-owned companies) worth around Rs17,583 crore in the next two months.

Jaitley said in his budget speech that the government will put in place a revised mechanism and procedure to ensure time-bound listing of identified state-owned companies on stock exchanges.

The finance minister identified Railways-owned state-owned firms and general insurance firms as probable candidates for listing in the stock market along with a second PSU exchange traded fund.